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A Chaebol Charges Toward The Top

June 19, 1994

The Corporation

A CHAEBOL CHARGES TOWARD THE TOP

In August, 1992, Chey Jong-Hyun, chairman of South Korea's Sunkyong group, beat four other conglomerates and won a license to start the nation's second cellular-phone company. Chey, whose products range from petrochemicals to videotape, had spent millions of dollars and worked more than two years with America's GTE Corp. and Britain's Vodafone Group PLC to design a new cellular network that would compete against the government-owned monopoly.

But even before the celebration was over, a political storm erupted. Korea was in the midst of a presidential campaign, and Chey was alleged to have won the license as a political favor from then- President Roh Tae Woo, whose daughter is married to Chey's son. Rather than become a political target, Chey gave up the license, much to the chagrin of his foreign partners. "It was a tough decision, but I had no choice," says Chey. Giant Pohang Iron & Steel Co. walked away with the prize.

Now, Chey's canny reading of Korean politics is paying off. In a bidding contest in January, Sunkyong won a 23% equity interest and management control of the government's Korea Mobile Telecom (KMT) for $534 million. Sunkyong will take over control of the newly privatized company in July with hardly a word of opposition. Even better, it will have a monopoly until the Pohang-led group starts competing in 1996.

The deal is a coup for several reasons. Sunkyong group, with $15.9 billion in total sales in 1993 (table), is Korea's fifth-largest chaebol. But despite its size, it has been struggling, eking out a narrow $68.8 million profit in 1993. Excluding sales among the 22 Sunkyong companies, the group lost $8 million, according to an estimate by Ernst & Young. The group's key problem is that petrochemicals and related products, its core business, is a mature industry under bitter competitive pressure.

By emerging as the first chaebol to get rolling in government-dominated telecommunications services, Sunkyong thrusts itself into a hot technological field. The cellular-phone business also is likely to be a big cash-spinner even after KMT's monopoly expires in 1996.

If Chey can pull off the move, Sunkyong could jump into the ranks of Hyundai, Samsung, Lucky-Goldstar, and Daewoo at the top of Korea's industrial power structure. The deal also shines a spotlight on Chey personally. As the new chairman of the powerful Federation of Korean Industries, he has emerged as the leading business voice in sensitive dealings between the chaebol and President Kim Young Sam. The Hyundai group's Chung family has lost ground because of a bitter feud with the government, and Daewoo group founder Kim Woo-Choong also has eased out of the public eye.

ALIEN NOTIONS. But before Chey, 65, can enjoy his new prominence, he must manage the foray into cellular. To his credit, he's considered one of Korea's most professional tycoons because of his Western-style management concepts such as smooth labor-management relations and professionalism among his executives--notions still alien to many of the family-dominated chaebol. But Chey spent five years in the U.S. as a student at the University of Wisconsin and then at the University of Chicago, where he took a master's in economics in 1958.

He used those lessons to save his elder brother's company, Sunkyong Textiles, the foundation for today's Sunkyong group. Soon after he joined the debt-ridden company in 1962, he decided to specialize in one area: synthetic textiles. For years, Chey stuck to the core business of energy, chemicals, and synthetic fabrics even though other chaebol were busy diversifying. "I didn't want to be No.2 in a new business," he says.

In the 1980s, Chey decided to move vertically upstream. He bought management control and 50% of the equity of Gulf Oil Corp.'s Korean subsidiary, now called Yukong Ltd., and entered the oil-refining business. Then, he moved downstream, producing petrochemical resins and derivatives. Yukong, which controls 38% of the domestic petroleum market, is the largest Korean refiner. With $6.7 billion in sales, it accounts for more than 40% of the group's sales.

Yukong's success is attributed largely to Chey's decision to train a cadre of professional managers. Chey says he drew a "fine line" to separate his functions from those of his managers as far back as in 1975. Rather than making major decisions on his own, he relies on an executive committee. And he almost never intervenes.

The key question is whether that management style will work as the group moves into telecommunications, where it lacks real operating experience. Chey has been preparing for this move since 1989, when he took a 20% stake in U.S. Cellular Corp.'s rural phone service in Tennesse. Later, when Chey was bidding for Korea's second cellular-phone company, his engineers worked with GTE and Vodafone to learn more about analog cellular technology.

CAPITAL SURPLUS. Chey plans to invest heavily in the new business. A number of analysts worry that continued thin profit margins in its traditional businesses could jeopardize Sunkyong's push into telecom. But despite scant profits, the group has a capital surplus of about $1.8 billion, estimates Ernst & Young. Korean companies are allowed not to declare certain kinds of profits to create these big capital surpluses. Moreover, Sunkyong plans to raise more funds from the Korean and foreign bond markets.

Chey also argues that the mature energy and chemical businesses require little new spending. And KMT is certain to generate cash. It posted $100 million in net profits on $530 million in sales in 1993. It is expected to grow at a 15% annual clip, estimates S.H. Chang of Ssangyong Investment & Securities Co. The startup of the second cellular company in 1996 could slow that growth down. But KMT will continue to be a dominant force with more than 70% of the market, Chang reckons.

Chey is already looking for ways to leverage his headstart in telecommunications into broader technological leadership. For instance, he wants to use KMT to develop niches such as mobile data transfer. No other competitor will be able to do that for at least five years. If Chey's telecom gambit works, more and more Koreans will be dialing Sunkyong's number.Laxmi Nakarmi in Seoul